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Sharks in the dark: quantifying HFT dark pool latency arbitrage

Author

Listed:
  • Matteo Aquilina
  • Sean Foley
  • Peter O'Neill
  • Matteo Thomas Ruf

Abstract

We investigate stale reference pricing and liquidity provision in dark pools using proprietary, participant-level regulatory data. We show a substantial amount of stale trading occurs, imposing large costs on passive dark pool participants. Consistent with these costs, HFTs almost never provide liquidity in the dark, instead frequently consuming liquidity, in particular in order to take advantage of stale reference prices. Finally, we show that market design interventions randomizing dark execution times are successful at countering dark pool latency arbitrage, protecting passive providers of dark liquidity. Our results have substantial implications for practitioners and policymakers aiming to improve liquidity provision in dark pools.

Suggested Citation

  • Matteo Aquilina & Sean Foley & Peter O'Neill & Matteo Thomas Ruf, 2023. "Sharks in the dark: quantifying HFT dark pool latency arbitrage," BIS Working Papers 1115, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:1115
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    References listed on IDEAS

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    More about this item

    Keywords

    high-frequency trading; dark pools; latency arbitrage; stale quotes; reference prices;
    All these keywords.

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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